Search Results
Working Paper
Data uncertainty and the role of money as an information variable for monetary policy
This paper demonstrates that money can play an important role as an information variable and may result in major improvements in current output estimates. However, the specific nature of this role depends on the magnitude of the output measurement error relative to the money demand shock. In particular, we find noticeable but small improvements in output estimates due to the inclusion of money growth in the information set. Money plays a quantitatively more important role with regard to output estimation if we allow for a contribution of monetary analysis in reducing uncertainty due to money ...
Working Paper
A quantitative exploration of the opportunistic approach to disinflation
A number of observers have advocated recently that the Federal Reserve take an ``opportunistic'' approach to the conduct of monetary policy. A hallmark of this approach is that the central bank focuses on fighting inflation when inflation is high, but focuses on stabilizing output when inflation is low. The implied policy rule is nonlinear. This paper compares the behavior of inflation and output under opportunistic and conventional linear policies. Using stochastic simulations of a small-scale rational expectations model, we study the cost and time required to achieve a given disinflation, ...
Working Paper
The performance of forecast-based monetary policy rules under model uncertainty
We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty: such rules respond to the one-year ahead inflation forecast and to the current output gap, and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. In light of these results, we identify a robust benchmark rule that performs very well in all five ...
Working Paper
Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence
The Federal Reserve and other central banks tend to change short-term interest rates in sequences of small steps in the same direction and reverse the direction of interest rate movements only infrequently. These characteristics, often referred to as interest-rate smoothing, have led to criticism that policy responds too little and too late to macroeconomic developments, suggesting to some observers that the Federal Reserve has an objective of minimizing interest-rate volatility. This paper, however, argues that the observed degree of interest-rate smoothing may well represent optimal ...
Working Paper
Robustness of simple monetary policy rules under model uncertainty
In this paper, we investigate the properties of alternative monetary policy rules using four structural macroeconometric models: the Fuhrer-Moore model, Taylor's Multi-Country Model, the MSR model of Orphanides and Wieland, and the FRB staff model. All four models incorporate the assumptions of rational expectations, short-run nominal inertia, and long-run monetary neutrality, but differ in many other respects (e.g., the dynamics of prices and real expenditures). We compute the output-inflation volatility frontier of each model for alternative specifications of the interest rate rule, subject ...
Working Paper
NAIRU uncertainty and nonlinear policy rules
Meyer (1999) has suggested that episodes of heightened uncertainty about the NAIRU may warrant a nonlinear policy response to changes in the unemployment rate. This paper offers a theoretical justification for such a nonlinear policy rule, and provides some empirical evidence on the relative performance of linear and nonlinear rules when there is heightened uncertainty about the NAIRU.
Working Paper
Efficient monetary policy design near price stability
We study the design of monetary policy in a low inflation environment taking into account the limitations imposed by the zero bound on nominal interest rates. Using numerical dynamic programming methods, we compute optimal policies in a simple, calibrated open-economy model and evaluate the effect of the liquidity trap generated by the zero bound. We consider the possibility that the quantity of base money may affect output and inflation even when the interest rate is constrained at zero and explicitly account for the substantial degree of uncertainty regarding such quantity effects. As an ...
Working Paper
Monetary policy and uncertainty about the natural unemployment rate
This paper studies the optimal monetary policy in the presence of uncertainty about the natural rate and the short-run inflation-unemployment tradeoff. Two conflicting motives drive policy. In the static version of the model, uncertainty provides a motive for the policymaker to move cautiously. In the dynamic version, uncertainty motivates an element of experimentation. I find that the optimal policy that balances these motives typically still exhibits gradualism, i.e., is less aggressive than a policy that disregards parameter uncertainty. Exceptions occur when uncertainty is very high and ...
Working Paper
Learning by doing and the value of optimal experimentation
Research on learning-by-doing has typically been restricted to cases where estimation and control can be treated separately. Recent work has provided convergence results for more general learning problems where experimentation is an important aspect of optimal control. However the associated optimal policy cannot be derived analytically because Bayesian learning introduces a nonlinearity in the dynamic programming problem. This paper characterizes the optimal policy numerically and shows that it incorporates a substantial degree of experimentation. Dynamic simulations indicate that optimal ...
Working Paper
Monetary policy, parameter uncertainty and optimal learning
Since central banks have limited information concerning the transmission channel of monetary policy, they are faced with the difficult task of simultaneously controlling the policy target and estimating the impact of policy actions. A tradeoff between estimation and control arises because policy actions influence estimation and provide information which may improve future performance. I analyze this tradeoff in a simple model with parameter uncertainty and conduct dynamics simulations of the policymaker's decision problem in the presence of the type of uncertainties that arose in the wake of ...